The good news is:
• There was no build up of new lows last week.
The negatives
The best bottom indicators are derived from new lows and downside volume. After a bottom has been reached new lows and downside volume diminish rapidly. There have not been many new lows, but there has been a lot of downside volume.
The chart below covers the past 6 months showing the NASDAQ composite (OTC) in blue and a 5% trend (39 day EMA) of NASDAQ downside volume (OTC DV) in brown. OTC DV has been plotted on an inverted Y axis so decreasing OTC DV moves the indicator upward (up is good). Dashed vertical lines have been drawn on the 1st trading day of each month.
OTC DV has been crawling upward, but, this is not the pattern we see at bottoms.
New next chart is similar to the one above except it covers the past 18 months to show how OTC DV has behaved at other short term lows during this rally. I have drawn arrows pointing out how the indicator moved sharply upward at other short term lows. It is also interesting to note that the current level of the indicator is well below the March 2009 bottom.
The next chart is similar to the 1st one except is shows the S&P 500 (SPX) in red and NY DV has been calculated from NYSE data. The pattern is similar to, but even more negative than the NASDAQ chart.
The next chart shows the SPX and NY DV over the past 18 months. NY DV has, so far, remained above the March 09 levels.
I have been optimistic because the late April highs were confirmed by everything that matters and that usually implies higher prices in the short term.
New highs were one of those confirming indicators.
The chart below covers the past 6 months showing the OTC in blue and a 10% trend (19 day EMA) of NASDAQ new highs (OTC NH) in green.
OTC NH usually heads upward a few days after a low. In spite of some spectacular up days OTC NH has failed to turn upward.
The chart below is similar to the one above except it shows the SPX in red and NY NH has been calculated from NYSE data. The pattern is similar.
The positives
There are not many, but, if you are a bull, here are some that can be spun positively.
The high for new lows this year was on May 6 the day of the "flash crash"Â there were 218 on the NYSE and 190 on the NASDAQ. The high numbers for last week were 40 and 96, high but not scary high and well below the May 6 figures.
The chart below covers the past 6 months showing the OTC in blue and a 10% trend (19 day EMA) of NASDAQ new lows (OTC NL) in black. Like OTC DV, OTC NL has been plotted on an inverted Y axis so up is good.
It is too early to draw conclusions, but, at least, OTC NL is heading in the right direction.
The chart below is similar to the one above except it covers the past 18 months. The indicator is well above the March 09 lows.
The next chart covers the past 6 months showing the SPX in red and a 5% trend of NYSE upside volume (NY UV) in green. NY UV hit a multi month high in late May and remains at its highest level in months.
The next chart is similar to the one above except it covers the past 18 months. NY UV is at its highest level since last fall.
The usefulness of NYSE breadth data has been deteriorating for years with the increase of fixed income issues on the exchange. The next chart showing the SPX in red and NYSE ADL (ADL - Advance Decline Line is a running total of declining issues subtracted from advancing issues) in blue. NYSE ADL has been holding up very well, but, cannot be taken too seriously.
The next chart is similar to the one above except it shows the NYSE composite (NYA) in red and AD ADL, in purple, has been calculated from NYSE equity issues only. Not as pretty.
Seasonality
Next week includes the 5 trading days prior to the 2nd Friday of June during the 2nd year of the Presidential Cycle.
The tables below show the return on a percentage basis for the 5 trading days prior to the 2nd Friday of June during the 2nd year of the Presidential Cycle. OTC data covers the period from 1963 - 2009 and SPX data from 1953 - 2009. There are summaries for both the 2nd year of the Presidential Cycle and all years combined. Prior to 1953 the market traded 6 days a week so that data has been ignored.
By all measures average returns have been negative over the coming week and the 2nd year of the Presidential Cycle has been the worst of all. The OTC has only been up once (1978) and the SPX has not been up since 1986.
Report for the week before the 2nd Friday of June
The number following the year is the position in the presidential cycle.
Daily returns from Monday to 2nd Friday.
| OTC Presidential Year 2 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1966-2 | 0.25% | -0.52% | -0.63% | 0.00% | 0.51% | -0.39% |
| 1970-2 | -2.19% | -0.49% | 1.17% | 0.13% | -1.12% | -2.50% |
| 1974-2 | 0.25% | -0.69% | -0.29% | 0.17% | -0.58% | -1.14% |
| 1978-2 | 0.88% | 0.61% | 0.20% | 0.72% | 0.34% | 2.76% |
| 1982-2 | -0.56% | -0.32% | -1.35% | 0.25% | 1.27% | -0.71% |
| 1986-2 | -1.38% | -0.48% | 0.66% | 0.28% | 0.77% | -0.15% |
| Avg | -0.60% | -0.27% | 0.08% | 0.31% | 0.14% | -0.35% |
| 1990-2 | 0.75% | -0.21% | 0.08% | -0.19% | -0.69% | -0.27% |
| 1994-2 | 0.14% | -0.56% | -1.29% | -0.12% | 0.74% | -1.09% |
| 1998-2 | 0.27% | 0.73% | -1.53% | -1.33% | -0.27% | -2.12% |
| 2002-2 | -0.31% | -2.19% | 1.47% | -1.47% | 0.53% | -1.97% |
| 2006-2 | -2.24% | -0.32% | -0.51% | -0.30% | -0.48% | -3.85% |
| Avg | -0.28% | -0.51% | -0.36% | -0.68% | -0.04% | -1.86% |
| OTC summary for Presidential Year 2 1966 - 2006 | ||||||
| Avg | -0.38% | -0.40% | -0.18% | -0.19% | 0.09% | -1.04% |
| Win% | 55% | 18% | 45% | 50% | 55% | 09% |
| OTC summary for all years 1963 - 2009 | ||||||
| Avg | -0.18% | -0.19% | 0.01% | 0.00% | 0.11% | -0.26% |
| Win% | 49% | 30% | 54% | 65% | 62% | 38% |
| SPX Presidential Year 2 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1954-2 | -0.38% | -2.24% | -0.67% | 0.67% | 0.85% | -1.77% |
| 1958-2 | -0.16% | -0.20% | 0.02% | 0.58% | 0.60% | 0.85% |
| 1962-2 | -3.55% | 0.52% | 1.42% | 0.02% | 0.09% | -1.50% |
| 1966-2 | -0.74% | -0.69% | 0.12% | 0.67% | 1.10% | 0.45% |
| 1970-2 | 0.16% | -0.05% | -1.01% | -1.36% | -0.32% | -2.59% |
| 1974-2 | 0.59% | -0.88% | -0.24% | 0.30% | -1.13% | -1.35% |
| 1978-2 | 1.84% | 0.37% | -0.20% | 0.09% | -0.28% | 1.83% |
| 1982-2 | 0.03% | -0.44% | -0.58% | 0.57% | 1.49% | 1.05% |
| 1986-2 | -2.32% | -0.16% | 0.65% | 0.15% | 1.76% | 0.07% |
| Avg | 0.06% | -0.23% | -0.28% | -0.05% | 0.30% | -0.20% |
| 1990-2 | 1.17% | -0.21% | -0.46% | -0.50% | -1.22% | -1.22% |
| 1994-2 | -0.27% | -0.15% | -0.25% | 0.18% | 0.18% | -0.32% |
| 1998-2 | 0.16% | 0.24% | -0.55% | -1.59% | 0.38% | -1.35% |
| 2002-2 | 0.31% | -1.66% | 0.66% | -1.05% | -0.23% | -1.97% |
| 2006-2 | -1.78% | -0.11% | -0.61% | 0.14% | -0.45% | -2.81% |
| Avg | -0.08% | -0.38% | -0.24% | -0.56% | -0.27% | -1.53% |
| SPX summary for Presidential Year 2 1954 - 2006 | ||||||
| Avg | -0.35% | -0.40% | -0.12% | -0.08% | 0.20% | -0.76% |
| Win% | 50% | 21% | 36% | 71% | 57% | 36% |
| SPX summary for all years 1953 - 2009 | ||||||
| Avg | -0.20% | -0.08% | 0.02% | 0.02% | 0.18% | -0.06% |
| Win% | 46% | 42% | 48% | 58% | 61% | 46% |
Money supply (M2)
The money supply chart was provided by Gordon Harms. The Fed is doing what it can; money supply has been increasing sharply since the market began declining.
Conclusion
The market has been following the average seasonal pattern for the 2nd year of the Presidential Cycle quite closely this year. The end of May - beginning of June rally was disappointing and now the seasonal pattern calls for an unpleasant 2-3 weeks.
I expect the major averages to be lower on Friday June 11 than they were on Friday June 4.
Last weeks positive forecast was a miss. This report is free to anyone who wants it, so please tell your friends. They can sign up at: http://alphaim.net/signup.html
Gordon Harms produces a Power Point for our local timing group meetings. You can get a copy of that at: http://www.stockmarket-ta.com/
In his latest newsletter, titled "Non-random Returns", Jerry Minton looks at the historical returns of the market during the election cycle "power zone". You can read about it and sign up for a free subscription at Alpha's website: www.alphaim.net.
Thank you,
